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If you’re a business owner and need access to cash, a small business loan can help. But it is crucial to choose the right type of loan. Choose the wrong loan and you risk waiting months for funds when you need them quickly or ending up with the wrong type of financing offer.
Small business loans can be tailored to specific needs, like helping you expand your warehouse or start a franchise. There are also loans that can give you access to cash when you have a pile of unpaid bills.
Most small business loans are available from online lenders, banks, and credit unions. Interest rates, fees, loan limits and terms vary by loan type, lender and borrower.
It’s important to understand how each loan works so you can choose the best option for your business. Below, CNBC Select reviews nine types of small business loans that can benefit your business.
9 types of small business loans
Term loans are one of the most common types of small business loans and consist of a lump sum of cash that you repay over a set period of time. Monthly payments will generally be fixed and will include interest in addition to the principal balance. You have the option of using a term loan for a variety of needs, such as living expenses and equipment.
Small Business Administration (SBA) loans are attractive to business owners who want a low-cost, government-backed loan. However, SBA loans are notorious for a lengthy application process that can delay when you receive funding. It can take up to three months to be approved and receive the loan. If you don’t need money fast and want lower interest rates and fees, SBA loans can be a good option.
Similar to a credit card, commercial lines of credit offer borrowers a revolving credit limit that you can usually access through a checking account. You can spend up to the maximum credit limit, pay it off, and then withdraw more money. These options are ideal if you are unsure of the exact amount you will need, as you only incur interest charges on the amount you withdraw. It’s like a term loan that requires you to pay interest on the entire loan, whether you use some or all of it. Many commercial lines of credit are unsecured, meaning you don’t need any collateral.
4. Equipment loans
If you need to finance large equipment purchases, but don’t have the capital, an equipment loan is something to consider. These loans are designed to help you pay for expensive machinery, vehicles or equipment that retains its value, such as computers or furniture. In most cases, the equipment you buy will serve as collateral in case you cannot repay the loan.
Business owners who find it difficult to receive payments on time can opt for invoice factoring or invoice financing (aka accounts receivable financing). With invoice factoring, you can sell unpaid invoices to a lender and receive a percentage of the invoice value up front. With invoice financing, you can use unpaid invoices as collateral to get an advance on the amount owed to you. The main difference between the two is that factoring gives the company buying your invoices control of collecting payments, while financing still requires you to collect payments so you can repay the amount borrowed.
Commercial real estate loans (aka commercial mortgages) can help you finance a new or existing property, such as an office, warehouse, or retail space. These loans act like term loans and can allow you to purchase a new commercial property, expand a location or refinance an existing loan.
Microloans are small loans that can provide you with financing of $50,000 or less. Since the loan amounts are relatively small, these loans can be a good option for new businesses or those who do not need a lot of money. Many microloans are offered by non-profit organizations or the government, such as the SBA, although you may need to provide collateral (such as business equipment, real estate, or personal property) to qualify for these. loans.
As traditional cash advances, merchant cash advances have a high cost. This type of cash advance requires you to borrow against your future sales. In exchange for a cash lump sum, you’ll pay it back either with a portion of your daily credit card sales or through weekly transfers from your bank account. Although you can often get a merchant cash advance quickly, high interest rates make this type of loan a big risk. Unlike invoice financing/factoring, merchant cash advances use credit card sales as collateral, instead of unpaid invoices.
9. Franchise Loans
Becoming a franchisee can help you reach your business ownership goal faster and easier than starting from scratch, although you will still need capital. Franchise loans can provide you with the money to pay the initial costs of opening a franchise, so you can get up and running. Even if you take out the loan through a lender, some franchisors may offer financing to new franchisees.
With so many options available, choosing a small business loan can be difficult. But if you assess your business needs, you can narrow down the options. Next, research a few lenders to see what interest rates, fees, loan amounts, and terms are offered. This can help you find the best loan for your situation and provide your business with the money it needs to succeed.
Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.